Are Peer Groups Necessary?

How A Different Use of Peer Group Data Could Improve Pay Comparisons and Simplify Disclosure

Most compensation committees rely to some extent on peer group data drawn from proxies/ annual reports (“proxy peers”) for benchmarking pay levels. However, it is important in such exercises to consider the limitations of this approach. It is also important to be clear about the balance between using this information to decide HOW to pay vs. HOW MUCH to pay.

Is the company using a peer group for insight into appropriate pay practices or to establish explicit pay levels?

Peer groups serve an important function for pay benchmarking, but using them in conjunction with survey information can strengthen a company’s analysis of competitive pay levels. Using peer groups as the exclusive source of pay comparisons for senior executives may not be appropriate for some companies.

This Perspective covers some of the shortcomings and misconceptions of peer group benchmarking from proxy disclosure data, as well as the potential advantages of supplementing proxy analysis with survey data in making executive pay decisions.

In this article we discuss:

  • The prevalence and benefits of peer groups
  • The limitations of proxy peer data
  • Advantages of using survey data

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